Arizona Supreme Court confirms that a public retirement plan does not violate common-law or constitutional pension protections by ending a longstanding practice that the plan never authorized in the first place.

For many years, a city had allowed its employees to count amounts received for “cashing out” their unused accrued sick and vacation leave at retirement towards their pensionable compensation.  The city amended its administrative regulations to halt the practice going forward.  A group of employees and unions filed two lawsuits claiming that the revised regulations unlawfully diminished and impaired their retirement benefits in violation of the Pension and Contracts Clauses.  The first (Piccioli v. City of Phoenix) dealt with sick leave payouts and the second (AFSCME, AFL-CIO, Local 2384 v. City of Phoenix) with vacation leave payouts.

In both cases, the Court of Appeals agreed with the city that the plain terms of the retirement plan did not require the city to count one-time payouts for accrued sick or vacation leave towards an employee’s “final average compensation” for pension purposes.  The court further held that because the plan did not require these amounts to be counted, the city could change its practice prospectively without violating the employees’ rights.

The Arizona Supreme Court granted review.  Interpreting the plain text of the retirement plan, the Court agreed that the plan did not require the city to count one-time payouts for accrued sick or vacation leave as pensionable “compensation.”  The Court reasoned that to be “compensation,” which the plan defined as “salary or wages,” the amounts must be paid at regular, periodic intervals.  Because one-time payments for accrued leave are neither regular nor periodic, the Court found that they cannot be counted as part of an employee’s “final average compensation” under the terms of the plan.  The Court also ruled that the city’s longstanding administrative practice could not create an independent contractual right to include these amounts in pension calculations because that practice conflicted with the plan’s terms.

Justice Timmer wrote the unanimous opinion.